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"When you look at the current labor market and wages, the economy isn’t that bad," Adachi said.

Some further softness is likely in the months ahead, said Hiroaki Muto, chief economist at Tokai Tokyo Research Center, as the yen’s recent appreciation starts taking hold from May or June, slowing the rise in food prices.

"Food and energy prices are supporting CPI right now," Muto said, adding that the BOJ will have no choice but to keep delaying its projected timing for reaching 2 percent. In fact, stabilizing core inflation above 1 percent will be a challenge, he said.

Making Progress

The BOJ had been making steady progress in generating inflation, raising expectations that Kuroda could begin to normalize policy as soon as later this year. Much of the gains have been driven by higher energy prices and a weaker currency, so the yen’s rise this year has complicated the outlook.

Yet domestic demand is picking up as Japan’s economy continues growing. Upward pressure from the positive output gap and improving wage growth are likely to sustain a broad trajectory of moderate price increases, Bloomberg Economics’ Yuki Masujima wrote in a report.

The March result reflected fading effects of energy prices and lower fresh food and import costs, Masujima wrote. "If oil prices are stable, core inflation may clearly exceed 1% in 3Q, in our view," he said.

External factors such as energy prices, the yen’s exchange rate and global trade tensions remain risks to the BOJ’s outlook. But recent price gains have relied less on external factors than previously. Stripping out fresh food and energy, prices climbed 0.5 percent in March.

Nationwide energy prices rose 5.7 percent from a year earlier in March, contributing 0.42 percentage point to price gains.

"The underlying trend hasn’t changed because inflation excluding fresh food and energy remained the same," said Maiko Noguchi, a senior economist at Daiwa Securities Co. and a former Bank of Japan official. "I think that’s the measure the BOJ really cares about because the bank can’t achieve 2 percent in a stable manner if it fails to rise from the current 0.5 percent."